The Oil & Gas Lease Is Available; You Can Buy the Lease

A REALTOR®-Associate in my company said this today in one of our land and ranch meetings while touting a lovely 269-acre parcel of land which I will be previewing later today.

I thought to myself, “That’s pretty cool. Owning the oil & gas lease is the next best thing to owning the minerals.”

Then I wondered if she really meant what she said.

Did she understand what she said? Did she mean what she said? Did she even know what she said?

[I kept my mouth shut in the meeting rather than interrupting and going off on a tangent — since nobody really cared anyway except me (I am one of those about whom it is said, “There’s always one in every group…..”) However, I couldn’t sleep. The distinction is important and I just cannot keep it to myself. I felt a blog coming on, so I got out of bed to write. So here it goes…….. ]

When we own land, we don’t actually own the land. We own a bundle of rights which includes the use of that land with restrictions.

When a landowner owns land in fee simple, that means he owns the full bundle of rights. Fee simple absolute or simply “fee simple” means that you own everything from the center of the earth up to where the government allows planes to fly.

As an owner, you can lease the entire bundle of rights to another person or you can lease a particular right. Thus you can lease the oil, gas and other minerals, you can lease the grazing rights, you can lease a cottage on the land (or just a room in that cottage), or you can lease hunting rights, etc.

If the mineral rights have been severed from the surface rights (meaning that a previous owner somewhere in the chain of title has retained the oil, gas, and other minerals in a recorded deed), then it is the owner of the mineral estate who has the right to lease the right to drill and produce the oil, gas and other minerals in and under the land. The landowner who only owns the surface cannot lease the minerals as the lessor.

However, the landowner who does not own the minerals can lease the minerals as a lessee. Usually it is someone other than the surface owner who leases the minerals (much to the dismay and sometimes anquish of the surface landowner). This is a pretty cool option.

Now, as someone purchasing a lease, it needs to be understood that a lease can and will expire. You can have a lease for 2 days or even 99 years — but no more. You cannot own a lease in perpetuity.

Having said that, an oil & gas lease is valid as long as it is in it’s primary term, be it 2 days, 3 years, 10 years, etc. This primary term is negotiated by a landman or an oil & gas attorney who is qualified to navigate the ins and out of such leases at the time that the lease is signed and purchased. A lease is a legal document that should be filed at the courthouse to have actual notice announcing to the world that such a lease exists. This is hugely important.

The lease is valid as long as it is in it’s primary term or is held by continuous production. Oh, there is the kicker, continuous production. In other words, if you are the leaseholder (the lessee or the assignee), then you had best be drilling or producing oil & gas that makes it clear that you are actually doing something. This is technical and many leaseholders lose their lease after pumping milions of dollars into wells in the hopes of making them profitable, only to lose their investments of time, expense, and effort to someone else who picks up the lease at a later time. Boo hoo, so sorry, good bye…..

Now if the leasholder does not have an operator’s license, then he must hire an operator to operate the lease. Only an operator can operate oil & gas wells. Anybody can own the lease, but they have to hire an operator if they themselves are not licensed to operate oil & gas wells. An operator is the only person authorized by the State of Oklahoma to do anything on an oil & gas lease. He must participate in every activity.

An operator can be a company or a person. An operator has a license number. In the eyes of the Oklahoma Corporation Commission Joe Operator is exactly the same as ExxonMobil and are under the same laws, rules, regulations, and restrictions. One operator is a single person and the other operator is a multi-national corporation. When either one comes on your land, they are exactly the same in the eyes of the State of Oklahoma. There is virtually no difference — they are both operators.

An oil & gas lease can be sold or assigned to another person by means of an assignment or a bill of sale. Both of these should be filed at the courthouse as soon as possible to effect actual notice of assignment of the oil & gas lease. Again, this is hugely important. Race notice literally means that the first person to the courthouse wins. No kidding, I heard of one situation in Rogers County where a lessee was dying and needed cash to pay medical bills. He assigned the same oil & gas lease to six or eight assignees. The first one to file the assignment at the court house got the lease.

Of course, you can own a lease that isn’t registered, but I recommend being safe. Toodle on down to the court house and get the documents filed.

Important note to self: Don’t leave legal documents in the kitchen drawer. File them at the court house! Then put original documents in a safe place, such as a safe deposit box.

“The lease is available; you can buy the lease.” I think she means that you can purchase an assignment. Or maybe she meant you can purchase the minerals from the owner of the mineral rights. I’ll have to ask her.